Directors And Bankruptcy In The UAE: When Can Management Face Personal Legal Exposure?

The separate legal personality of a company is a cornerstone of UAE commercial law, but it has never been an impenetrable shield. When a company slides into insolvency, the conduct of its directors and managers comes under intense judicial scrutiny, and the corporate veil can be lifted with serious personal consequences.

 

This area is now governed by Federal Decree-Law No. 51 of 2023 on Financial Restructuring and Bankruptcy (the "Bankruptcy Law"), which came into force on May 1, 2024, repealing the previous regime under Federal Decree-Law No. 9 of 2016. Its implementing regulation was issued through Cabinet Resolution No. 94 of 2024 and, since July 15, 2025, a dedicated Bankruptcy Court, headquartered in Abu Dhabi, has heard bankruptcy cases.

 

Critically, the new law widens the potential scope of liability beyond board members and managers to any person responsible for the actual management of the company, effectively capturing shadow and de facto directors, as well as those responsible for liquidation. This article examines the principal grounds of personal exposure, leading case law and practical lessons for management.

 

Decisions Made During Financial Distress

 

The moment a company approaches the zone of insolvency, the risk calculus for its management changes fundamentally. A debtor must apply for the opening of proceedings within 60 days of ceasing payments or becoming aware that it cannot meet its debts.

 

However, late filing no longer triggers automatic criminal liability under the new law, with the focus having shifted towards the substance of the company's solvency and the conduct of those managing it. More significantly, Article 246 of the Bankruptcy Law imposes liability on directors, managers and any person responsible for the actual management of the company where that person takes undue risks in relation to the company's affairs during the two-year period preceding insolvency.

 

Where liability is established, the court can order that person to pay an amount sufficient to restore the company's position as if the wrongful act had not occurred. Reckless trading, speculative ventures and continuing to incur credit with no realistic prospect of repayment during financial distress can therefore create significant grounds for personal claims.

 

Improper Disposal Of Company Assets

 

Asset-stripping during the period immediately preceding bankruptcy is a classic trigger of liability. Disposing of company assets at an undervalue within the two years preceding insolvency is expressly among the acts for which management can be held personally accountable under Article 246. Sales of property, transfers to related parties or gratuitous dispositions made when the company was already unable to pay its debts may be unwound, with the responsible individuals potentially ordered to make good the resulting shortfall.

 

Liability may also attach where mismanagement causes the company's assets to fall below 20 per cent of its due debts during the two years before payments ceased, an insufficiency threshold that has its roots in the earlier legal regime.

 

Preferential Treatment Of Certain Creditors

 

Equality of treatment among creditors, reflected in the principle of pari passu distribution, is a fundamental feature of insolvency proceedings. Entering into a preference transaction with a creditor during the two-year suspect period preceding insolvency can expose the individuals responsible to a personal contribution order. Paying a favoured supplier, a related company or a personally guaranteed debt ahead of the general body of creditors, particularly when the company is insolvent, is precisely the type of conduct that the courts may scrutinise, reverse and penalise.

 

Corporate Records And Financial Reporting

 

Proper books and records are among a director's first lines of defence. Failure to maintain adequate accounting records, or their concealment, falsification or destruction, deprives the trustee and the court of the ability to reconstruct the company's affairs and may therefore be treated with particular severity.

 

Under the framework as developed following early case law, misfeasance relating to company books, disposal of assets or preferential payments can form the basis of management liability, introducing an element of culpable conduct rather than mere insolvency. Separately, Article 162 of the Commercial Companies Law, Federal Decree-Law No. 32 of 2021, provides an independent basis for claims against directors in cases involving fraud, abuse of authority or gross mismanagement.

 

Consequences Of Fraudulent Conduct

 

Where dishonesty is involved, exposure can escalate from civil compensation to criminal sanctions. Civil liability is primarily restorative, requiring compensation proportionate to the individual's fault, whereas criminal liability under the Bankruptcy Law's penal provisions is punitive and can result in imprisonment and fines. Fraudulent bankruptcy offences typically involve concealing or destroying books, fabricating losses, hiding assets or acknowledging fictitious debts. Procedurally, the courts also have coercive powers. The Bankruptcy Court may impose travel bans on directors and board members as precautionary measures during proceedings, while asset freezes affecting personal wealth may also be ordered where legally justified.

 

Case Law

 

Marka Holdings PJSC (Dubai Court of First Instance, October 10, 2021). In what was reported as the first known instance of such an order in the UAE, the Dubai Court of First Instance held the directors and managers of the insolvent listed company personally liable for outstanding debts exceeding Dh448 million. The decision was based on findings that the company's assets could not cover at least 20 per cent of its debts, together with findings of management misconduct. The court also stripped the directors and managers of their management rights, imposed freezing orders over their personal assets and referred the matter to the Public Prosecutor. The decision attracted significant attention and was followed by a legislative amendment requiring, in addition to the 20 per cent shortfall, proof of culpable acts concerning company books, asset disposals or preferential payments.

 

Dubai Court of Cassation, November 2024. The Court of Cassation held former shareholders personally liable as de facto managers for Dh850 million, finding that, despite having formally exited management more than 10 years earlier, they had retained real influence over the company's decisions. The judgment was reported as the largest personal liability award of its kind in UAE history.

 

Conclusion

 

The UAE has moved towards a modern, accountability-driven insolvency regime in which the protections of separate legal personality and limited liability do not extend to misconduct. Federal Decree-Law No. 51 of 2023, together with the developing case law, makes clear that directors, managers and anyone exercising actual control over a distressed company must carefully consider their conduct as insolvency approaches.

Management should act early, obtain professional advice, preserve company assets, treat creditors fairly, maintain accurate records and document the commercial rationale behind significant decisions. In the two years preceding insolvency, transactions and management decisions may later be examined by a trustee and a specialised court. Where misconduct is established, the financial consequences may extend beyond the company to the individuals responsible.

 

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